The Rise and Fall of Commercialized Historical Districts: A Case Study of Tianzifang

Abstract

This paper takes Tianzifang, a renowned historical district in Shanghai, as a case study to explore the rise and subsequent decline of commercialized historic areas. Building on an analysis of the factors behind Tianzifang’s initial popularity, the study further investigates how its competitive edge gradually eroded. It argues that Tianzifang’s business model reflects a phenomenon of endogenous industrial selection, driven by market forces and manifested through what this paper terms a rent spiral mechanism. A two-sector general equilibrium model is developed to analyze this mechanism. Additionally, a vertical differentiation framework from the heterogeneous product literature is used to explain how decreasing product heterogeneity among creative firms leads to shrinking profits. Combining the two approaches, the paper suggests that an endogenous trend toward de-creative homogenization has diminished product distinctiveness, resulting in lower profitability for businesses. Finally, the paper reflects on the new challenges facing Tianzifang in the post-pandemic era and outlines possible trajectories for its future development.